Evolve Your Money Management Beyond the Budget

Budgets are a lot like diets — a lot of people know they should be on one, but the thought of it is met with a collective "Ugh" (cue heads hitting the table and exasperated sighs). All this budget angst has me wondering — does budgeting really even work? Just off the top of my head, I can think of a handful of ways traditional budgeting is a less-than-perfect system for managing our money and living within our means. (See also: 8 Ways for Improving or Starting a Budget)

How Budgets Let Us Down

Here are just a few of the ways.

Creating a Budget Requires Discipline and Time

Let’s face it; most would-be budgeters never get past the header row of their spreadsheets. Confusion, intimidation, or boredom sets in and prevents people from estimating and tracking their expenses successfully. In this way, budgets are the financial equivalent of a treadmill — they represent the very best intentions, but seldom get used.

Budgets Are Difficult to Stick To

Even when budgeters create a viable, realistic system to keep their spending in check, they seldom stick to it. Budgets bend, expand, get tabled, and eventually abandoned.

Budgets Are Designed to be Inflexible

Budgets are usually stagnant, even when our incomes aren’t. Successful budgeters train themselves to live and die by the parameters they’ve established on paper and seldom retool, rework, or rethink their approach. As our incomes, expenses, and opportunities fluctuate, our budgets usually remain locked-in.

Budgets Don’t Teach; They Only Modify Behavior

Budgets may be a great temporary tool for financial training (or retraining), but they don’t work well for long-term strategic money management or for creating and seizing dynamic financial opportunities.

Budgets Don’t Encourage Innovation

Most budgeters focus heavily on the expense side of their personal financial equations without giving the same level of attention to the income side. It’s important to innovate — not only by cutting expenses, but by being challenged to increase income. If your income and expenses never vary and you stick to the plan, you’re a gold-star budgeter. But that rote approach isn’t necessarily the recipe for long-term financial success.

A Better Way

So, is there a better way to keep tabs on our spending and live within our means long-term without the constant number-crunching and sense of deprivation? I think so. Instead of siloing every last dollar, I think it makes much more sense to adopt a four step money management approach that saves first and rewards last (with more saving).

1. Artificially Reduce What’s Available to Spend by Paying Yourself First

Skim off or divert 15-20% of your income before the money even hits your checking account. This would be the same as the "savings" column of a traditional budget. Direct the funds to whatever investment vehicles you’ve chosen based upon your level of risk, goals, savings horizon, etc.

2. Next, Pay All Fixed Expenses

A portion of the remaining funds is used to pay overhead like mortgage, cell phone, electricity, etc. (according to pay schedule and billing cycles).

3. Live on What’s Left

No complex spreadsheets, no rigid guidelines, no robbing Peter to pay Paul. The remainder of your variable expenses gets paid via the balance. Overspending in one area either depletes the rest, or becomes a call to boost income quickly. Make an unwavering promise to yourself that padding the process through the use of credit is not an option.

4. Save the Rest

Any money that’s leftover gets cycled right back into savings, rather than accumulate for next month.

Granted, this method isn’t for newbies or the faint-of-heart. I think of it as Budgeting 301 after prerequisites like 101 and 201 have been mastered. It accomplishes the same thing as traditional budgeting, but leverages your hard-won discipline and knowledge and allows for more flexibility. Since every dollar isn’t flagged for a purpose, spending can be more fluid.

Over time, even saving becomes easier; the "stealth" goal of pocketing what’s left over becomes a powerful motivator — traditional budget categories expand, contract, or don’t get funded at all. As each spending cycle draws to a close, your motivation to cut back, get creative, or earn more is rewarded by an extra little lump sum that no traditional budget would have factored in.

If you’ve paid your budgeting dues and honed your money management skills, it’s OK to waver a bit from a life ruled by rows and columns. If you know how to avoid temptation or compensate for a splurge without running to plastic, explore a more hands-free system that acknowledges your skill and might even help you save more in the long run.

Do you follow a traditional budget or has your savings strategy evolved over time? What budget tricks or tips do you use that might be considered unconventional?

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joy #1

This is exactly how I run my money. When you only make available to yourself an amount of money you can 'afford' to blow, it becomes less important to nickel and dime your daily life into oblivion because all the important stuff is already taken care of.

I like the simplicity of this strategy: Pay yourself first, pay your bills, live on the rest and save any left over. I actually think this is 101 because it's not intimidating to those who are just beginning to realize they need to manage their money better.

You still have to have a solid understanding of what your "bills" include, which means more than just the ones that come up every month (such as insurance premiums, car repair, etc.).

Great tips! I don't budget myself, but the way I go about spending my money is I put half of my paycheck in my savings, use the other half to pay my expenses for that month, and then play with the leftovers!

I've been doing this for a year, and it works well for me. The psychological benefit in paying myself first is the best reward. The only thing I do differently is that I do not save the rest after savings, bills and expenses. That wouldn't work for me. Because my income is so tight right now, whenever I have money left towards the end of the month, I use it for whatever I wasn't able to pay for earlier---supplies that are on clearance, getting household repairs done, etc. It still feels like a bonus, and I'm still motivated to cut expenses during the month--it just ends up in a different place. Great article, thanks!

Budget is one of those words that people do not like. It implies that they need to be frugal and stick to a strict regime. I like this new approach, which is still budgeting but just with a different approach that makes people feel less confined when managing their money.

This is exactly what I do, and I was feeling guilty that I don't have an official "budget". I mostly use a debit card for immediate subtraction, and pay off my credit card online weekly so I know how much money is really left to play with.